Indian Budget Could Bring Some Retail Therapy

The Indian shopper, at least the urban one, could be in for a big surprise starting Monday morning. Analysts tracking the Indian retail sector expect the federal budget Monday to indicate a road map for allowing foreign direct investment in multi-brand retail.

On Friday, a few of the listed Indian retailers were celebrating the prospect that a relaxation of existing laws would bring in the foreign capital this market needs for further expansion.

Associated Press

Monday’s federal budget could bring good news for retails giants like Wal-Mart which have been eyeing the Indian market.

Shares of Pantaloon Retail (India) Ltd., part of India’s Future Group, closed 5.7% higher at 278.75 rupees ($6.15). While shares of Trent Ltd., a part of the Tata conglomerate, closed up 3.1% at 837.80 rupees on the Bombay Stock Exchange.

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Foreign retail giants like Wal-Mart Stores Inc. and Carrefour S.A. have been knocking on India’s doors for years. They are currently allowed 100% foreign direct investment in the cash-and-carry business, which means that they can independently run wholesale stores that supply to small stores, restaurants, hotels and other business outlets. But they are prohibited from directly investing in retailers selling to consumers.

Currently, only single-brand retailers like Marks & Spencer Group PLC and Nike Inc. are allowed to bring in up to 51% foreign direct investment into India.

But all this may change if and when the government allows these foreign multi-brand retailers to sell directly to Indian customers.

Depending on how much the government relaxes existing laws, a Wal-Mart or a Carrefour may start selling to the Indian shopper on its own or through partnerships with Indian players like the Future Group, Aditya Birla Group and the Tata Group.

Asia’s third-largest economy holds tremendous potential for companies such as Wal-Mart and Carrefour as only a small portion of India’s retail market is organized, providing huge growth opportunities. The Indian retail market is currently estimated to generate annual sales of nearly $450 billion.

Till now, foreign investment in retail has faced stiff political opposition over fears that neighborhood stores will perish if they have to compete with big multinational retailers.

Of late, however, more have warmed up to the idea that opening up foreign direct investment in retail could benefit consumers, suppliers, farmers and small retailers. Last year, the Indian government looked into how opening up foreign direct investment in this sector would affect these various stakeholders.

Many government departments are also in favor of liberalization of foreign direct investment norms for the retail sector on the grounds that such a move will bring in higher foreign investment in cold storage, warehousing technology and logistics and thus help reduce food price inflation.

India has also been under some international pressure to open up its retail sector. On his recent trip to India, U.S. President Barack Obama called for India to remove caps on foreign investment in sectors including retail and insurance. France has brought up this issue as well during President Nicolas Sarkozy’s visit last December.

While the relaxation in foreign direct investment rules is expected to benefit all Indian retailers, analysts see Pantaloon Retail as the benefiting the most. A possible deal between the Future Group–the owner of Pantaloon Retail–and Carrefour has been on the cards for some time now.

Carrefour has previously said it is in talks with potential Indian partners to establish its large hypermarket stores in India. Future Group had also said it was talking to international retailers for a possible alliance. But both have declined to name each other as a possible partner.

Carrefour’s global rival Wal-Mart already has a presence in India through a 50-50 joint venture with Bharti Enterprises Ltd. Bharti Wal-Mart Pvt. operates wholesale stores under the brand Best Price Modern Wholesale.

Separately, Wal-Mart has a franchise agreement with Bharti Retail Ltd., a unit of Bharti Enterprises. Wal-Mart provides technical support to Bharti Retail’s brand of Easyday stores. All three companies couldn’t be immediately reached on their expectations from the Budget or their future India plans.

Still, as the budget approaches, get ready for some serious retail therapy.

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